Rushing for funding​ is probably one of the top reasons startups actually fail! The ‘startup industry’ has been corporatized because it can bring in loads of cash for investors. But how beneficial is it to the entrepreneur and his idea to raise funding at the earliest possible time?

While applying for funding rounds, founders are usually forced to divert their attention from their existing operations to preparing plans and presentations. These times can be very critical in developing their team and products and exploring their market. Not to mention that founders’ shares in their own companies dilute every time they add on investors. And their control and interest for their own companies start to decrease.

A study done by the ​Kauffman Foundation​ on fast-growing companies in the US between 1997-2007 concluded that 756 out of 900 companies grew without any venture capital at all. That is a big 84%!

This article will list the five business models discussed by ​John Mullins​ in his book ​The Customer-Funded Business​. Mullins believes that entrepreneurs should look for their business funds in their customers’ pockets before entreating investors for cash.

1. MatchmakerModels

Like UBER and Airbnb. In this type of business, you are not actually buying or selling anything. You are just helping people buy and sell from each other, by providing a marketplace. A good example from the old business world is a real-estate agent.
The beauty of this model is that you can start with no or limited investments easily.

2. Pay-in-advanceModels

Like airline tickets and Dell in its early years. What most people do not know about the success of the Michael Dell’s business model is that in making the customized computers for small businesses, Dell asked for money in advance. And because there was an apparent need to what he was offering, plus his sales skills, he managed to land many deals to kick off his business. He used that money to buy the parts and pay his colleagues who were working with him.

3. Subscription Models

Like Netflix and SaaS businesses in general. Self-explanatory, this model brings in predictable recurring revenue to your accounts. Furthermore, you get to test and closely monitor your customers’ behaviors, need shifts, and willingness to pay. Giving you a great feedback loop.

But keep in mind that you need to carefully study your customer acquisition cost, churn rates, profit margins, and frequency of orders to know how and where to invest your money. Balancing between these metrics will make or break this type of business.

4. Scarcity and Flash Sales Models

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Like Zara! Zara reinvented the fashion industry when they restricted what is being offered in quantity and time. This was opposite to what was usual to the fashion industry back then, which was to sell as much of everything as possibly as you can!

If you are a customer of Zara and was ever in the shop and thought to yourself ‘​I’d better buy this now or else it’ll be gone​’; then you can easily grasp the rationale behind such an approach. They simply created higher demand. There are many other factors to the success of such a model, like following what celebrities wear, but overall you get the idea!

5. Service-to-product Models

How-to manuals and Self-help books. Although turning products to services is a more common approach for the purpose of regular revenue; products are more likely to bring you cash ahead.
Product businesses are often more scalable than service businesses, and typically less dependent on an individual’s talent. So if you are in the service business, get creative and think of product ideas that can get you cash in advance.

The conclusion that The Customer-Funded Business​ book is trying to underline, is that the startup’s modern race to funds should not be for everyone. Not even for most. As a young entrepreneur, you should start your journey in bootstrapping and creativity. And not in dependence on a formerly designed path drawn for you by others. If you fail, you learn. If you don’t, well. I’ll leave that one for your imagination!

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